The report adds, however, that the forecast is “vulnerable to the evolving macroeconomic conditions in a severe, albeit unexpected scenario.”

Underpinning the stable outlook, the report says, is a restoration of capital reserves and liquidity to pre-recession levels; reduced investment losses and reduced reliance on institutional funding sources; as well as a restructuring of product offerings, in part by mitigating market risk through hedging.

FitchRatings cautions, however, that the financial picture for insurers could suffer if the debt crisis in Europe engulfs the U.S. financial services sector. Insurers also remain vulnerable to sustained low interest rates and the possibility of a double-dip recession.

While acknowledging that VA manufacturers have strengthened their variable annuities hedging programs, the report also expresses concern that these initiatives could be compromised by hedging costs, policyholder behavior risk, sensitivity to tail risk and the “long-dated nature” of policy liabilities.

“Emerging experience is indicating that the industry’s assumptions may have been too aggressive, as a number of insurers have increased reserves in 2011 to reflect emerging experience,” the report states. “Fitch expects this trend to continue.”